The Real Terms of the Google Deal

The Real Terms of the Google Deal

Google's equity class structure (10 votes per share for “us”, 1 vote per share for “you”) is designed to keep insiders in control, pocketing investors' dollars while letting them sit in the back seat for the ride. In this, they're following the lead of media companies like the New York Times and the Washington Post which have long enjoyed structures that have kept control in the family, literally for generations.

This insulation from shareholder pressure has been criticized as arrogant and anti-democratic, but it is also prudent, I'm sad to say, since Google intends to run its business with an eye to risky, creative experiments that are poorly understood or tolerated by the public markets.

Even so, Google wants to have its cake and eat it too. While they may have been forced to pull the trigger on the IPO by SEC rules limiting the number of shareholders in a private company, there was no chance, given its venture capital investment, it would not go public sooner or later. It's just part of the deal. Moreover, Google needs to have liquidity and the prospect of a rising stock price as an incentive to motivate and attract the success-minded, high I.Q. workforce it requires. People want to work at a Google for many reasons; financial upside is near or at the top of the list for most.

But an even deeper problem is that the relationship between Google and its prospective shareholders is a form of mutual exploitation slightly worse than usual and much more evident because of the greed and envy factor.

Google says: Give us your money and we'll sell you a lottery ticket. We know what we're doing, so it would be counter-productive for you to have any control over what we do. Sit in the back seat and enjoy the ride and don't think too much about the odds.

The Public says: We're willing to go along for the ride if it means we get to benefit from your money-making magic. We're still in love with the fantasy of striking it rich; we miss the early days of the Dotcom boom. Can we get in? (Personally I think buying into the Google IPO is a sucker bet, but investing in public stocks isn't how I made my money).

In a better world, would all public corporations be more accountable to their shareholders? Hell, yes. But today's shareholders are, in the main, no better than the vast majority of companies they invest in. They only really care about their financial upside, not the means by which it is achieved. Exploitation of labor here and abroad a la Wal-mart, environmental degradation, and massive corporate welfare through government subsidies and sweetheart deals a la Halliburton are perfectly acceptable sources of profit and make for perfectly good investments most say.

At least the Google guys want to do the right thing in terms of responsible corporate citizenship and for this they should get a lot of credit. What needs to change are the basic terms of the deal between public companies and the public. Business success needs to be measured not just by profit, but by social impact as well. In a world where that was the norm, absolute returns on stocks might be slightly lower, but absolutely everyone, would be better off.  [Mitch Kapor's Weblog]

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